Verizon (NYSE:VZ) has played an essential role in communications for decades. From landlines and wireless to internet and television, Verizon and its predecessors have served generations of Americans. This has also made VZ stock a conservative, stable investment.
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However, the rise of 5G promises to again change the company’s role in American life. Due to a deeper reach into machinery and electronic components, the economy will depend even more heavily on wireless. With its massive 5G investment, VZ stock will transition to both an income and a growth stock as the company and its two largest peers solidify their oligopoly status.
Verizon vs. AT&T
1) Sprint (NYSE:S) will leave the scene either by takeover or decline.
2) The launch of 5G will make wireless more essential than ever to the U.S. economy.
Admittedly, in the past, I have stated my preference for AT&T. The current dividend yield of about 6.6%, and the fact that T-Mobile does not pay a dividend primarily explain why. However, AT&T has also chosen to enter the content race.
This has left that company more heavily in debt and, hence, riskier. Verizon currently holds around $113 billion in debt, much lower than AT&T’s debt of approximately $176.5 billion. Moreover, with declining revenues in pay-TV and the current spending by the likes of Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) on content, AT&T’s gamble could easily fail.
For investors who want both a dividend and something closer to a pure-play on 5G wireless, I see VZ stock as the choice. Verizon has made some comparatively modest investments in content. Verizon Media includes sites such as AOL, Yahoo, MapQuest and Tumblr. However, that pales in comparison to AT&T’s stake in Time Warner and DirecTV. With a $4.6 billion write-down of some of these media assets, Verizon has become primarily focused on its 5G future.
VZ Stock Focuses Mainly on Dividend Investors
The dividend yield exceeding 4.1% offers a lot to income-oriented investors. Not only does the payout stand at more than double the S&P 500 average, but it also increases yearly. Verizon has raised this payout every year for the last 12 years. Even before 2007, the dividend generally trended upward, albeit more slowly.
In the past, VZ stock has typically not attracted investors focused on growth. Looking at current figures, one can understand why. Analysts expect profit growth of only 0.8% this year and 2.1% in 2020. Even at a modest forward price-to-earnings (PE) ratio of 12, buyers will not flock to VZ for that reason alone.
5G Will Turn VZ Into an Income and Growth Play
However, I agree with my colleague Luke Lango that 5G will change those growth numbers and that perception. 5G will power more than just laptops and mobile devices. Thanks to 5G, artificial intelligence (AI) and Internet of Things (IoT) technology will power more electronic devices, as well as cloud and data center services.
As a result, 5G will increase the importance of wireless in people’s lives. Smart appliances, self-driving cars, and numerous other electronic components will soon depend on 5G. This fact may have helped the VZ stock price rise above $58 per share in recent months.
I refer to Verizon as part of the “Wireless Big Three” because only three companies can offer this essential service. Like the “Big Three” of the previous century, they will enjoy tremendous market power as part of this oligopoly. I think this will drive not only higher profit margins, but also multiple expansion for VZ stock. Also, with the tens of billions it costs to build a 5G network, I do not foresee any new market entrants. In the end, Verizon stock will further prosper because it helps make the future possible.
The Bottom Line on VZ Stock
VZ stock will become one of the more significant income and growth stocks due to a solidifying wireless oligopoly. At a yield exceeding 4.1%, Verizon stock has already become one of the more attractive income plays. Its stable cash flows and its role in communications have bolstered that role for decades. Now the rise of 5G will expand the significance of that capacity exponentially.
For investors who do not mind the risks associated with a large investment in content, I would probably choose AT&T. However, for those who feel more comfortable with the almost single-minded focus on 5G, I think VZ stock will serve income, and ultimately, growth investors well.
Look for 5G to make the coming wireless oligopoly considerably more essential and, by extension, more profitable for holders of Verizon stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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